Tag Archives: GDP

(Revised) China GDP Grows Even Slowers

China’s gross domestic product growth in the first quarter decreased to 7.4% that is the slowest level in 18 months. The continuous economic slowdown of the world’s second-largest economy really makes people worry as China plays a more and more important role in the global market.

Since about three years ago the government started to emphasis the development of financial market and innovation of technology instead of relying on export and governmental investment. Therefore, some economists treated the slowdown of China’s economy as an inevitable sign during the transition. “It’s a move in the right direction,” said ING economist Tim Condon. He thinks 2013 was not a good year for restructuring in China, but the situation could be better in2014. However, China’s GDP growth has fallen to 7.4%, compared with the double-digit growth few years ago. Should we worry about the further slowdown of China’s economy?

There are signs of slowdown in many areas. Due to the control over housing market, the fixed-asset investment that covers machinery, land and buildings slightly increased to 17.6% in the first quarter, which is less than the 17.9% expectation. The growth of retail sales struggled to keep the same level as before. However, the anti-extravagance campaign introduced by the government could seriously affected officials’ consumption of luxury goods such as cars, yachts and tourism. Moreover, bad news also came from its financial market. The local government debt level has become an increasing danger. Defaults also happened on trust loans and corporate bonds since the start of 2014. As more and more problems exposed, Chinese government should really take some measure to stop the trend of slowdown before it is too late.

In the long term the aging population will also be a threat the economy. Right now China still has millions of people trying to get into big cities from rural areas and keep a relative low labor cost. However, the society has shown a very sign that the graying dependents are ballooning because of decades of One-Child Policy. Once the country gets older, not only the economy will lose its vitality but also the social culture would change and seek safety and stability instead of risk and acquire.

Premier Li Keqiang said that China needs to keep economy growing at a speed of 7.2% in order to provide enough employment. Before the figure reaches the bottom line, the government announced a plan of economic stimulus in April. It includes the construction of railroad and rural area.  Other measures such as tax reduce and governmental investment in the market could also be expected as the following steps of the government. On the other hand, the market gave a positive response to the measures of government. The stock markets in Shanghai and Hong Kong went up after the announcement.

Therefore, the economics reform could no longer be an excuse for the slowdown as the GDP growth has almost reached the bottom line. It is time for the government to take actions to activate the economy and labor market as well as recover the growth to a safe level.

China GDP Grows Even Slower

china-gdp-growth-annual

China’s gross domestic product growth in the first quarter decreased to 7.4% that is the slowest level in 18 months. The continuous economic slowdown of the world’s second-largest economy really makes people worry as China plays a more and more important role in the global market.

Since about three years ago the government started to emphasis the development of financial market and innovation of technology instead of relying on export and governmental investment. Therefore, some economists treated the slowdown of China’s economy as an inevitable sign during the transition. “It’s a move in the right direction,” said ING economist Tim Condon. He thinks 2013 was not a good year for restructuring in China, but the situation could be better in2014. However, China’s GDP growth has fallen to 7.4%, compared with the double-digit growth few years ago. Should we worry about the further slowdown of China’s economy?

There are signs of slowdown in many areas. Due to the control over housing market, the fixed-asset investment that covers machinery, land and buildings slightly increased to 17.6% in the first quarter, which is less than the 17.9% expectation. The growth of retail sales struggled to keep the same level as before. However, the anti-extravagance campaign introduced by the government could seriously affected officials’ consumption of luxury goods such as cars, yachts and tourism. Moreover, bad news also came from its financial market. The local government debt level has become an increasing danger. Defaults also happened on trust loans and corporate bonds since the start of 2014. As more and more problems exposed, Chinese government should really take some measure to stop the trend of slowdown before it is too late.

Premier Li Keqiang said that China needs to keep economy growing at a speed of 7.2% in order to provide enough employment. Before the figure reaches the bottom line, the government announced a plan of economic stimulus in April. It includes the construction of railroad and rural area.  Other measures such as tax reduce and governmental investment in the market could also be expected as the following steps of the government. On the other hand, the market gave a positive response to the measures of government. The stock markets in Shanghai and Hong Kong went up after the announcement.

Therefore, the economics reform could no longer be an excuse for the slowdown as the GDP growth has almost reached the bottom line. It is time for the government to take actions and recover it to a safe level.

Italy’s “Disneyland of Food” (Revised)

When you think of a theme park, generally you think of roller coasters, waterparks, zoos, aquariums, and other attractions of the sort. In 2015, Italy plans to ditch the traditional theme park style and open up what will become the “Disneyland of Food”. With Italy being famous for its cuisine and culture, the theme park will feature nearly 125 restaurants, grocery stores, food courts, and learning labs. There will even be “live trees” where customers can pick their produce, as well as spaces for kids to play with food.

1

The graph above shows Italy’s gross domestic product growth rate for the past few years. As you can see, GDP expanded 0.1% in the fourth quarter of 2013, which was its first increase in 10 quarters. With this economic downturn that Italy has been facing, creating the world’s largest theme park dedicated to Italian food might just be what the economy needs. Despite the large funds that will go into the development of this project, revenues are expected to be around 86 million euros ($118 million). With revenues like this, the theme park could easily help Italy’s economy start to emerge.

The development of a theme park has different effects and consequences on the economy of the host region. For example, Italy’s “Disneyland of Food” is more aimed towards the potential benefit of creating jobs to ultimately spur consumer spending, creating an educational opportunity for children, and promoting their culture and cuisine. Not only will the park provide a fun way for tourists to get a taste of Italy, but it will also provide a learning experience for young children. With all these goals in mind, Italy has the hopes of attracting some of its yearly tourists to the city of Bologna as a way to boost GDP growth. The theme park isn’t necessarily something that a tourist would visit Italy specifically for; however, if you were already planning to visit Italy, it would be a great addition to the city of Bologna in terms of bringing in extra revenue from tourists looking to experience the culture and cuisine of Italy.

On the other hand, other theme parks such as Cedar Point are solely focused on bringing in revenue for their host city. Sandusky isn’t exactly a city that would attract tourists on its own so building what has become the roller coaster capital of the world was one way to boost consumer spending. Each year, millions of people from all over the world travel to Sandusky specifically to experience the thrill of Cedar Point. After a successful season last year, Cedar Point revenues went up 6%, reaching nearly a billion dollars in revenue. With revenues like this year after year, you can see why Cedar Point is such a huge asset to the economy.

Not only will Italy’s “Disneyland of Food” create thousands of new jobs, providing income to customers which will ultimately spur consumer spending and result in GDP growth, but as the president of the city of Eataly states, “It is an opportunity to show off Italy’s extraordinary biodiversity of resources.” “And to help push us towards our economic potential.” With a little bit of advertising, I think Italy’s theme park of food will be a great effort to harness tourism in Italy to kick-start the economy by creating jobs and spurring consumer spending.

Climate Change Damaging Global Economy

Global warming is a long-term problem and the impacts of climate change are slowly beginning to take a greater and greater toll on the economy in terms of economic output and growth. Climate change is having a widespread impact on everything from water resources to food production and weather patterns. Sea-level rise, floods, droughts, wildfires, and extreme storms not only cause great damage to property and infrastructure which calls for unforeseen government expenses towards extensive repair, but they also disrupt everyday life which can result in lost productivity. For example, sudden climate changes can mean lost work or school days as well as an impairment to transportation, agriculture, fisheries, and even tourism. To put things into perspectives, a report released by the United Nations Intergovernmental Panel on Climate Change said that a global temperature rise of just 2.5 degrees Celsius above preindustrial levels could lead to global economic losses between 0.2% and 2.0% of income. By the end of the century, it said that climate change could reduce labor productivity by 11% to 27% in humid, tropical areas.

Changing precipitation and melting ice are altering hydrological systems, affecting water resources in terms of quality and quantity. In addition, many marine species have shifted their geographic ranges, seasonal activities, and migration patterns to adapt to these changes. The largest impact, however, has been on crops, with negative impacts outweighing the positive impacts.

There are large differences between and within countries, however, impacts are being felt most heavily in developing countries. In Bangladesh, for instance, climate change has resulted in total losses of about 3-4% of GDP. Sheikh Hasina, Bangladesh’s prime minister, states that “A 1C rise in temperature is associated with 10% productivity loss in farming.” It is the equivalent of losing 4 million tons of food grain, amounting to about $2.5 billion in addition to adding up the damages to property and other losses. It is estimated that by 2030, the cost of climate change and air pollution combined will rise to 3.2% of global GDP with the world’s least developed countries suffering losses up to 11% of their GDP.

For countries at all levels of development, these impacts are consistent with a significant lack of preparedness for current climate variability. Throughout the 21st century, climate-change impacts are projected to slow down economic growth, make poverty reduction more difficult, and prolong existing and create new poverty traps. With losses possibly accelerating with greater warming, a call for swift actions on greenhouse gas emissions is a step in the right direction.

Consumer Debt and the Economy (Revised)

Everyone has had that one credit card bill that they’ve opened up and cringed at the amount due. But how can such small purchases add up so quickly in only a month? Most people don’t realize just how much money they are spending when they use a credit card to buy their purchases. However, most of the debt in our country comes from consumer spending. Since consumer spending drives the economy and fuels nearly 70% of U.S. GDP, consumers must be in a sound financial position. If consumers become overburdened with debt, they will not be able to drive economic growth. The table below shows the total amount of household debt, total nominal GDP, total nominal disposable personal income, and the ratio of household debt to both GDP and disposable personal income; all the numbers are in billions of dollars:

econ

As you can see, over the past 30 years, U.S. consumers have increased both total household debt and the percentage of that debt relative to overall GDP and DPI. At some level, the total amount of debt can become so large that it can force consumers to slow their spending and thus begin to negatively affect the health of the economy. This is why in times of a recession, governments try to encourage consumer spending by lowering taxes and lowering interest rates. When consumers slow down their purchases, business’ profits are lowered which eventually lead to lay-offs; worsening the downward spiral. The more debt that is held, the less money is available to be put away in savings and reinvested in the economy.

After 2009, consumer debt began to slowly decline for the next few years. Recently however, since the beginning of 2013, Americans have been taking on debt at a rate not seen since the country spiraled into the Great Recession. Consumer debt increased in just the fourth quarter of 2013 by $241 billion, the largest quarter to quarter increase since 2007. Below is a graph of the quarter to quarter household debt balance since 2003 and its composition:

Household Debt 2013Q4A

This total debt balance was a combination of Americans boosting credit card balances, increasing borrowing to buy more homes and cars, and taking on more student debt. Balances on credit card accounts alone increased $11 billion during the fourth quarter, making it the third largest source of household indebtedness. Only the mortgage and student loan debt markets were larger.

You would have thought that after the chaos of the recession, we would have become better at keeping track of our debt. However, data shows otherwise. According to a survey released by Bankrate.com, 28% of Americans have more credit card debt today than they have in a savings fund. This means that over a quarter of Americans wouldn’t be able to pay off their debt even if they used their entire savings! But, despite consumers’ savings records, banks are loosening up their credit card limits to levels not seen since the recession. This easy access to credit along with low interest rates during boom years is what brings Americans to take on record levels of debt. This does not mean that we are on the road to a second recession however. Americans’ increase in household debt could actually have to do with increased consumer confidence in the economy as it relatively improves. Higher spending leads to more jobs and higher incomes, which ultimately leads to higher consumer spending. For consumers with extra money in their wallets, taking on more debt may not seem so risky. And, as we know, consumer spending puts the economy on a positive track.

So can this notion that “Americans are spending way too much” be curbed and should it be? Financial advisers offer several tips on how to stop spending so much money and get back on track financially. Two of these tips include tracking your cash flow and tapping into your feelings to restrain your urge to spend. There is a difference between needing something and wanting something, and budgeting helps you to see areas where you may be overspending. Therapist Nancy Irwin says that overspending tends to be a coping mechanism. “You need to find the underlying issue that is trying to be fixed by overspending and learn how to deal with it in a healthy manner. There is nothing wrong with keeping up with the latest trends or being indulgent from time to time, as long as the intent is in the right place.” There is a fine line between spurring growth and digging the nation deeper into an economic sinkhole if too many houses are burdened with debt. Before you hand over your credit card, you need to think twice. You should ask yourself what need you are trying to fulfill and if you are going to be able to pay it off when the bill comes in the mail.

 

Consumer Debt and the Economy

Everyone has had that one credit card bill that they’ve opened up and cringed at the amount due. But how can such small purchases add up so quickly in only a month? Most people don’t realize just how much money they are spending when they use a credit card to buy their purchases. However, most of the debt in our country comes from consumer spending: buying more than you can afford at the moment with the presumption that you will be able to pay it off later. Since consumer spending drives the economy and fuels nearly 70% of U.S. GDP, consumers must be in a sound financial position. If consumers become overburdened with debt, they will not be able to drive economic growth. The table below shows the total amount of household debt, total nominal GDP, total nominal disposable personal income, and the ratio of household debt to both GDP and disposable personal income; all the numbers are in billions of dollars:

econ

As you can see, over the past 30 years, U.S. consumers have increased both total household debt and the percentage of that debt relative to overall GDP and disposable income. At some level, the total amount of debt can become so large that it can force consumers to slow their spending and thus begin to negatively affect the health of the economy. This is why in times of a recession, governments try to encourage consumer spending by lowering taxes and lowering interest rates. When consumers slow down their purchases, business’ profits are lowered which eventually leads to lay-offs; worsening the downward spiral. The more debt that is held, the less money is available to be put away in savings and reinvested in the economy.

So can this notion that “Americans are spending way too much” be curbed? Financial advisers offer several tips on how to stop spending so much money and get back on track financially. Two of these tips include tracking your cash flow and tapping into your feelings to restrain your urge to spend. There is a difference between needing something and wanting something, and budgeting helps you to see areas where you may be overspending. Therapist Nancy Irwin says that overspending tends to be a coping mechanism. “You need to find the underlining issue that is trying to be fixed by overspending and learn how to deal with it in a healthy manner. There is nothing wrong with keeping up with the latest trends or being indulgent from time to time, as long as the intent is in the right place. It’s OK to keep up with the latest technology if you are into that or you enjoy giving your kids the biggest pool on the block as long as it comes from a creative place and serves your high consciousness and not just your ego.” There is a fine line between spurring growth and digging the nation deeper into an economic sinkhole if too many houses are burdened with debt. Before you hand over your credit card, you need to think twice. You should ask yourself what need you are trying to fulfill and if you are going to be able to pay it off when the bill comes in the mail.

Japans Down but Not Out!

Despite the Asian market showing promising comebacks, Japan’s Q4 report fell below economist expectations. Disappointing growth figures from Japan’s report showed that GDP only rose 1% as opposed to its anticipated 2.8%. For a country in need of fiscal strengthening and economic growth after years of deflation, this was not the news some hoped for.

Though despite some optimism from economists on Japan’s situation, an increase in the country’s sales tax this coming April from 5% to 8% will further hurt the numbers by contracting spending. So why is Japan increasing their sales tax? They hope that this will cut the nations debt down to size, a priority that the administration put ahead of economic growth. To counteract short run price contraction, Prime Minsiter Shinzo Abe promises more economic stimulus for citizens and businesses. Even with his adminstration’s efforts, economic growth isn’t looking as impressive for a country that has historically been growing very quickly since the 1960s.

 “We need to understand that my administration’s top priority of putting an end to 15 years of deflation is no easy task,” Mr. Abe said earlier on Tuesday. “Furthermore, it’s important to strike a balance between economic recovery and fiscal soundness.” [WSJ]

 “This weak export performance gives us a sense of risk that the Japanese economy may significantly stall after April,” Takuji Okubo, chief economist at Japan Macro Advisors in Tokyo, told Bloomberg Television. “Prime Minister Abe really needs to be quick in showing to the market that he can deliver reform.” [Bloomberg]

Japan has low unemployment and is the 3rd largest country in terms of nominal GDP. It’s a leading nation in technological research and has had its economy long driven by exports. Though exports did edge up this past quarter, they were not enough to make up for previous losses. Companies like Nintendo Co., which has not been performing very well with its latest generation console, Wii U. The system has struggled to sell as much as its predecessors hurting exports a bit I presume.

 In 2011, the Tohoku earthquake/tsunami and brought Japan to its knees in trouble. Mass casualties and economic crippling it has been referred to as the toughest, most difficult crisis in Japan since WWII. This was followed by the Fukushima Daiichi nuclear disaster which worried its citizens about their health and safety and is still in the process of reaching full recovery to this day.

I think Japan deserves to make a turn around here. They have faced devastating hurdles such as when the country was hit by tragedy back in 2011. As the largest patent filing, a lot of technological innovation namely with robotics/automobiles/etc come out of Japan. I would look to see Japanese ingenuity and confidence thrive and continue.

GDP increase supports FED’s decision

When the FED announced its FOMC decision on Wednesday, it announced a decision that had been alluded to for months.  US markets declined for the rest of the day, while money flowed into treasuries in spite of the FED pledging to keep rates low for the foreseeable future.  While some may see this as a negative sign, daily perturbations of the stock market aren’t the best gauge for economic growth and turmoil in emerging markets could also have played a factor.  Thursday’s release of 2013 fourth quarter GDP brought further evidence that the economy is getting better and supports the FED in their decision to reduce asset purchases.

The GDP of the United States went up at an annual rate of 3.2% in the fourth quarter of 2013, primarily due to an increase in consumer spending.   The largest decreases came from reductions in government spending, as well as residential fixed investment.  Considering the economy still grew, a reduction in government expenditures is not necessarily a bad thing, while cold temperatures and rising rates have put pressure on the housing market, dragging down residential investment.  The housing market is expected to rebound in the spring, as there is evidence of a seasonal downturn in the housing market in the winter months.  A graphic taken from the Wall Street Journal shows this nicely:

im1

As can be seen in the time series on the right hand side, the decrease in government expenditures has been somewhat of a trend.  Even more telling is that the economy still grew at the rate it did despite the government shut down, which could be the cause of majority of the decrease even though it appears that the shut down probably wasn’t even good for the predicted loss, though it set the country back in many other ways.  However,   not all sign point in the right direction though.

Inflation has proven elusive for the United States.  While many consider inflation a bad thing, the FED has made a case for why it targets 2% inflation.  The price index only increased by 1.2%, which is well below the target.  It may appear that the economy is able to absorb more stimulus and move closer to the target rate the FED has set, unemployment has been elusive as well, and is a bigger problem then .8% inflation.  Perhaps the FED thinks QE has done all it can for unemployment.

The GDP numbers released on Thursday where a positive sign for the United States economy.  Even though the government shut down had been predicted to have a large adverse effect, that effect may have been exaggerated.   The growth in GDP is an indication that even though the economy has been recovering slowly, and unemployment is higher then it we would like, the economy is might be picking up momentum.  It supports the FED’s decision to decrease asset purchases earlier in the week. The economy will need to continue this pattern of growth if it is going to return unemployment to a comfortable level.

Despite Signs of a Strengthening U.S. Economy, Investors Fly to Quality

At the expense of emerging markets, capital is finally returning to the United States. For example, a number of emerging market currencies have been steadily depreciating against the dollar. Why have investors decided to return to U.S. assets? Because the U.S. is showing signs that the recovery is gaining traction. Data released on Thursday 1/30/14 showed that fourth quarter gross domestic product grew at a seasonally adjusted rate of 3.2%. According to the Wall Street Journal, “A big driver of growth in the fourth quarter was a rise in consumer spending, which grew at 3.3%, the fastest pace in three years. Consumer spending accounts for roughly two-thirds of economic activity”. Consumer spending is an indispensible component of economic growth. I think increased business investment is likely to follow this strong consumer spending. With healthy amounts of business investment and consumer spending, future prospects for the U.S. economy look extremely bright for the first time in awhile! The Fed’s decision on Wednesday 1/29/14 to continue the taper was primarily based on the strengthening U.S. economy (it is also partially due to the fact that the Fed does not like using quantitative easing).

As the U.S. continues to strengthen and attract capital, where are investors putting their capital – the stock market or the bond market? The answer is the bond market, which is evidenced by climbing 10-year Treasury prices and falling yields (recall that prices and yields move in opposite directions). The decision of investors to enter the bond market represents a flight to quality. Government bonds are a risk free investment (the downgrade does not concern me at all). Despite the evidence of a U.S. economic recovery, investors still prefer to invest in the bond market. According to the Wall Street Journal, “Much of the surprise can be attributed to the sudden turmoil in emerging markets and worries about a slowdown in China’s economic growth, which have driven investors to investments perceived as safer, notably government bonds”. Struggling emerging markets and China’s slowdown understandably create concern for investors, which contribute to their decision to buy bonds over stocks. First, falling international markets can hurt U.S. portfolios with exposure to slowing growth in emerging markets as well as China. This could then hurt consumer discretionary spending. Second, coordinated growth would be much healthier for the global economy than one where some countries take from others. Although investors in developed countries might be pleased to see economic improvement in the U.S, the risks of contagion from emerging markets and globally induced deflationary pressures are valid reasons for concern.

Nonetheless, the flight to quality comes as a surprise. I, for one, expected yields to rise as the Fed tapered. Tapering means decreasing Fed demand for bonds and falling demand causes prices to fall and yields to rise. Moreover, the fall in yields goes against the intentions of the Fed’s decision to taper. As the U.S. economy improves, the Fed wants yields to begin rising. Quantitative easing was initially implemented to lower long-term interest rates. Now, the Fed intends to let interest rates slowly increase through tapering.

In any case, I do not think rates are going to continue going lower indefinitely. The flight to quality only makes sense as long as investors are worried about something. According to the Wall Street Journal, “Some investors and strategists said they believe rates will end the year higher, but agree there may be room in the interim for them to dip lower than previously thought”. I agree and think that we will ultimately see rates rise, however, I am not sure when.

Two Faces of Recent and Future Consumer Spending

Consumer expenditure makes up about two thirds of the gross domestic product in the United States each year. With this in mind, it’s fairly obvious that the state of the economy is essentially in sync with consumer spending, for better or for worse. This can be a very good thing when consumers have lots of money to spend as the economy would be in great shape. In the final quarter of 2013, GDP grew by 3.2% (seasonally-adjusted rate) while consumer spending grew at a rate of 3.3%, clearly a large driver of the fourth quarter growth. The second half of 2013 actually saw the strongest growth since 2003, when the economy was flourishing. Recently, there has been a rise in consumer confidence, people are spending more, and in order to meet this increased demand, suppliers have been ramping up production. Evidently, this is good for the condition of the economy.

On the other side of the coin lies the possibility that consumer spending is going to take a hit and slow down due to slow income growth this year. If people are not making an increased amount of money, how can we expect them (us) to continue to spend more and more money?

The income figures “raise a degree of caution for the near-term outlook because some pullback in spending growth seems likely,” said Scott Brown, chief economist at financial firm Raymond James & Associates Inc. “We came into the year priced for a strong recovery, and now it looks like it might stumble a bit.”

This is certainly a cause for concern about the economy and its continued recovery. As slow and weak as it has been, the recent increase in consumer spending has been reason for optimism looking forward; but now we might take a step backward. 

That being said, the likelihood that slow income growth will stifle consumer spending is not set in stone. The increase in consumer spending towards the end of 2013 came with flat incomes in the month of December. Also, even if incomes do not grow in the near future, people can always save just a little bit less or hold off on repaying debt for the time being in order to sustain their higher amounts of spending. “The personal saving rate fell to 3.9% in December from 4.3% in November.” So clearly there are things that we (the consumers, or at least some consumers) can do, and have already started to do, in order to continue spending. It is extremely important to the continued recovery of our economy that consumers keep on spending at increased levels, and while this may not be easy to do, it can certainly be done. It will be interesting to see the growth levels of the economy and consumer spending several months from now. Hopefully any slow income growth that the country faces will not be the be-all and end-all to sustained growth in consumer expenditures going forward.